Skip to main content
The Actuary: The magazine of the Institute and Faculty of Actuaries - return to the homepage Logo of The Actuary website
  • Search
  • Visit The Actuary Magazine on Facebook
  • Visit The Actuary Magazine on LinkedIn
  • Visit @TheActuaryMag on Twitter
Visit the website of the Institute and Faculty of Actuaries Logo of the Institute and Faculty of Actuaries

Main navigation

  • News
  • Features
    • General Features
    • Interviews
    • Students
    • Opinion
  • Topics
  • Knowledge
    • Business Skills
    • Careers
    • Events
    • Predictions by The Actuary
    • Whitepapers
    • Webinars
    • Podcasts
  • Jobs
  • IFoA
    • CEO Comment
    • IFoA News
    • People & Social News
    • President Comment
  • Archive
Quick links:
  • Home
  • The Actuary Issues
  • June 2013
06

Risk management: bridging the gap

Open-access content Tuesday 4th June 2013 — updated 11.17am, Tuesday 5th May 2020

Alex Ntelekos calls for closer ties between actuaries and catastrophe modelling

In my professional experience so far, I have had ample chance to interact with actuaries. As a matter of fact, and as strange as it may sound to the outside world, I am very proud to say that some of my best friends are actuaries.

Coming into this industry about five years ago, knowing little about the actuarial profession, I was not sure what to expect in terms of the knowledge and expertise of actuaries. I was quickly impressed by their statistical skills, their keyboard-only use of Excel and their tremendous appetite for numbers, formulas and quantitative analysis, not to mention their high working standards.

However, one area that the profession didn't seem as connected to was that of catastrophe modelling. As catastrophe risk is a major driver of risk for non-life (re)insurers, I would have expected most actuaries to be true experts. This has not always been the case.

Actuaries typically appreciate the intricacies of the calculation of an event loss table or a year loss table. They know how to perform Monte Carlo simulations to produce distributions and apply reinsurance terms. However, they usually stop short of further in-depth knowledge of catastrophe models. In true actuarial style, I have narrowed down the reasons for this to three components.

> Black-box mentality: cat models are complicated beasts. In the same way that fine art or classical music are perceived by some to belong to a closed elite, cat models are thought to be understood only by the few and the proud. The underlying physical processes driving these models require some formal training to understand, and the models themselves are too proprietary to be straightforward.

> The focus of the Institute and Faculty of Actuaries (IFoA) training: this has not traditionally included catastrophe risk or models as a separate subject. This is, to a certain extent, a direct consequence of black-box mentality - in contrast, there is a greater focus on economic scenario generators, where transparency is perceived to be higher. However, it does not explain all the variance. Actuarial students are being exposed to an array of subjects, but the visibility of catastrophe risk is relatively low, compared with its overall importance, and it is usually treated as part of insurance risk.

> Organisational structure: insurance and reinsurance companies may keep actuarial teams isolated from the business. Although this ensures a degree of independence and challenge, when overdone it hinders ability to make meaningful contributions.


All change

The overall ability of the insurance industry to challenge and understand catastrophe models has increased during the past 10 years. Cat modelling vendors have become more transparent and documentation quality has improved. Regulatory requirements are calling for more openness and challenge around catastrophe models. An increasing number of academics are interested in cat models and open architecture platforms have been launched. The world of cat modelling is opening up and black-box mentality will be démodé.

In my view, the IFoA will quickly respond to the challenge and increase the visibility of cat models within its curriculum. Extensive exam questions on cat modelling appeared after a major update of one of the vendors in 2011. This recognised the fact that cat models are becoming essential in the management of catastrophe risk within firms. It would only benefit future actuaries if the curriculum more explicitly recognised catastrophe risk as a separate subject and if training were part of continuing professional development.

Last, but not least, firms should look to further embed the actuarial function into the cat business. As the industry moves towards a more technical and analysis-based approach, firms that bring actuaries closer to the catastrophe risk, aggregate management and underwriting team to cross-pollinate expertise are likely to be winners. Actuaries should also actively look to learn more about catastrophe risk. Opportunities for a secondment to the cat team, a training programme or a seminar can only be of benefit to an actuary's professional career and to the industry as a whole.

Alex Ntelekos is a technical specialist in the insurance division of the Prudential Regulation Authority (PRA), a subsidiary of the Bank of England

This article appeared in our June 2013 issue of The Actuary.
Click here to view this issue
Filed in:
06
Topics:
Risk & ERM

You might also like...

Share
  • Twitter
  • Facebook
  • Linked in
  • Mail
  • Print

Latest Jobs

Senior Underwriting Risk Manager

London (Central)
£85K-£95K + Benefits
Reference
124386

Reserving Manager (Contract)

London (Central)
£1200 - £1400 per day
Reference
124385

Life Actuary - Contract - IFRS 17 Financial Impact

England, London / England, Bristol / North Yorkshire, England
£900 - £1150 per day
Reference
124384
See all jobs »
 
 

Today's top reads

 
 

Sign up to our newsletter

News, jobs and updates

Sign up

Subscribe to The Actuary

Receive the print edition straight to your door

Subscribe
Spread-iPad-slantB-june.png

Topics

  • Data Science
  • Investment
  • Risk & ERM
  • Pensions
  • Environment
  • Soft skills
  • General Insurance
  • Regulation Standards
  • Health care
  • Technology
  • Reinsurance
  • Global
  • Life insurance
​
FOLLOW US
The Actuary on LinkedIn
@TheActuaryMag on Twitter
Facebook: The Actuary Magazine
CONTACT US
The Actuary
Tel: (+44) 020 7880 6200
​

IFoA

About IFoA
Become an actuary
IFoA Events
About membership

Information

Privacy Policy
Terms & Conditions
Cookie Policy
Think Green

Get in touch

Contact us
Advertise with us
Subscribe to The Actuary Magazine
Contribute

The Actuary Jobs

Actuarial job search
Pensions jobs
General insurance jobs
Solvency II jobs

© 2022 The Actuary. The Actuary is published on behalf of the Institute and Faculty of Actuaries by Redactive Publishing Limited, 71-75 Shelton Street, London WC2H 9JQ. Tel: 020 7880 6200